Spreads, Financial Management

Spreads

The difference between two futures price is referred to as ‘spread'. For the same underlying good, if there are two different prices on two different expiration dates, the underlying spread is referred as ‘intra commodity' spread (also known as a ‘time spread'). If the spread is between two futures prices for two different but related commodities, such as corn oil futures and cottonseed oil futures, it is referred to as ‘inter commodity spread'. If the price difference is between two markets for the same commodity, it is known as ‘inter-market spread'. The spread relationships are significant due to the act of speculation. Theoretically, there should be no inter-market spread as the difference in rates is adjusted by the cost-of-carrying or transportation cost, but as discussed above, if the price difference is large enough and there is a seasonality of demand and supply, price differences may occur giving rise to inter-market spreads.